While the move to become the first retail broker in Britain by Trading 212 to offer “commission-free” trading for new and existing customers across shares and exchange traded funds (ETFs) on its platform - with no limit on the frequency and value of trades - might look audacious, a land grab and a great marketing initiative, the wider aim of the firm's founders is to foster a “longer-term investing” mentality with lower risk.
The same zero commission offer is also being made available through the firm’s newly launched stocks and shares ISA (Individual Savings Accounts), which offers investors access to thousands of ISA eligible stocks across the world’s leading exchanges - including those in the U.S, Britain and Germany that spans around 1,800 stocks currently - as well as exchange traded funds (ETFs).
This latest bold move to remove all commission follows Trading 212’s launch last year of a zero commission share trading service. It enabled investors who registered for its service to make 10 trades per month at no cost.
This all might be described as akin to first mover advantage, with confirmed reports and rumors in the market earlier this year that other equity trading platform operators will follow suit in the U.K. One such party in this fray includes Revolut, British digital-only bank. It revealed this June according a Thomson Reuters report that it was building a commission-free trading platform on its app.
The push was to undercut traditional financial services. But other names that have cropped up for moves of a similar fashion and have encompassed Freetrade as well as Robinhood Markets Inc., a U.S.-based financial services firm headquartered in Menlo Park, California.
In 2016, Trading 212’s platform went on to gone on to become the U.K.’s highest rated financial trading app, with it being downloaded over 12 million times across Apple’s Appstore and via Google Play (rated 4.4. out of 5 on iOS). And, last year they reached the number 1 spot in Germany in terms being of rated. Today the company has around 50,000 active clients in Europe and is growing fast.
With the average commission charged by five of the largest online share-dealing platforms running at £8.31 (c.$11) per trade according to DJB Research, and leading brokers such as Hargreaves Lansdown and Interactive Investor charging £11.95 (c.$15.77) and £10 (c.$13.20) respectively, and levying additional fees for ISA wrappers, Trading 212’s new unlimited offer is set to further disrupt a market that sees retail investors’ returns decimated by high transaction costs. The impact can be dramatic for those investing small amounts.
In addition to shares and ETFs, Trading 212 has also removed all commission from trading cryptocurrencies and Contracts for Difference (CFDs). On the cryptocurrency front the broker offers trading in the top 10 most popular currencies - including bitcoin and ethereum.
Impact Of Fees On Trading Equities
To illustrate the current landscape, an investor who is looking to build a share portfolio over a five-year period by investing £300 (c.$ 396) month placing three equity trades using Hargreaves Lansdown (excludes regular monthly savings commission rate) will pay £2,151 (c.$2,840) in commission and platform charges. That equates to 11.95% of their investment, which is a pretty big hit.
So let's look at the numbers. Now assuming a market neutral environment and ignoring stamp duty, a Trading 212 investor using the above scenario above would see their portfolio grow to £18,000 (c.$23,760). By contrast, if they were to choose Hargreaves Lansdown for executing trades it would be worth £15,849 (c.$ 20,920). (Note: These figures were based on research conducted by DJB Research Ltd in September 2018. The Sterling exchange rate to U.S. dollar used was 1.32 as of September 19).
Crypto Trading Volatility & Millennials
According to Trading 212, the recent boom in trading volatile cryptocurrencies such as bitcoin has been particularly popular among millennials - also known as 'Generation Y' (typically with starting birth years from the early 1980s and the mid-1990s). But by making saving and investing in shares and ETFs free of charge and removing the hassle, the firm is seeking to encourage more of this generation to diversify into this less volatile asset class.
Its research, which was based online research carried out by Consumer Intelligence among just over 1,000 investors this August, revealed that over the last 12 months millennials have carried nearly a fifth (18%) more crypto trades than older generations. And, 13% more millennials plan to put more money into shares than older investors over the next year, these findings suggest.
An Appetite For Change?
The zero-commission initiative comes at a time when investors are showing a growing appetite for change. DJB Research also reveals that the majority (59%) of U.K.-based equity traders are “considering switching” to a new trading platform over the next 12 months, with 28% of them claiming it is because they want to "reduce the cost of their trading."
Among cryptocurrency and CFD traders, the percentage of these participants considering switching platforms is put as 78% and 82%, respectively.
Ivan Ashminov, co-Founder of Trading 212, commenting said: “Being the first company to offer U.K. investors a commission-free trading environment speaks to our long-held belief that this charging practice can no longer be justified. It will add further pressure on the established players who have been allowed to fleece investors for too long.”
The 39-year old Bulgarian added: “Our cutting-edge technology means that the actual cost of executing a retail trade is negligible, but the impact of commission and platform charges on the customers’ returns can be huge.” But it does beg the question how they will make money from the move. Clearly, it will come from the spreads on equity/ETF transactions and interest on margin for CFD traded products.
New Generation of Crypto Traders
When I met Mr Ashminov, who studied computer science and maths at the University of Sofia, in London's financial district this week just prior to the announcement on zero trading, he acknowledged that the crypto boom during 2017 had "kind of stalled the show” with regards to their launch of 10 free equity trades per month in June 2017. That said, he stressed that last year's launch had been met positively.
He added: "So, it did not make sense for us to keep talking about equity investing when everybody [last year] - including the media - had their spotlight on the crypto space. Now we are back on track with our strategy."
In offering access to a universe of some 1,800 stocks that can be traded on the major indices in the U.S, U.K. and Germany (plus ETFs), the co-founder pointed out that unlike other brokers who have a low cost trading model, Trading 212 has "no internalization" of client orders (i.e. mixing/selling the retail flow to institutional/high frequency trading funds). "The orders of our clients are directly routed to the market," he explained.
On the general thrust of their new offering and shaking up the market, he wanted to "emphasize that this exercise has nothing to do with CFDs with instruments...it's about real equity investing and a longer-term perspective." He was also not too phased about the new service coming with markets being at pretty much their highs of late.
Ashminov, who founded a “start-up in a garage” in his twenties that eventually mushroomed into what later became Trading 212, said: “Crypto trading has attracted a new generation of young people who do not see the need to pay for basic services such as trade execution. They are also looking to broaden their exposure away from cryptos towards shares and ETFs. And, removing commission will only increase their appetite.”
He added: “In contrast to other fintech companies who are focusing on the highly volatile crypto market, we want to democratize the ownership of shares and ETFs, so investors can enjoy their long-term benefits. It’s only a matter of time before the established players will have to get rid of commission altogether.”
David Black, an independent retail investment analyst, commenting on the present landscape said: “The trading platform market has never been more exciting in terms of innovation and service. More providers are coming into the market and are constantly pushing back the boundaries, and Trading 212’s announcement today is the strongest example yet of what to expect.”
The market is certainly a crowded one, with figures showing that currently there are 339 broking entities who are listed as member firms with the London Stock Exchange Group in the U.K.
The Technology
The Trading 212 app is underpinned by proprietary market-leading technology, which enables customers to enjoy what is described as "a fast and frictionless" investing experience. It offers free access to advanced features such as technical analysis and various integrated social media features, such as video tutorials and a live chat room, to encourage greater engagement and education around trading in shares.
Roger Lawson, ex-chairman of the U.K. Individual Shareholder Society (ShareSoc) with several thousand members and an active stock market investor, canvassed over Trading 212's move to disrupts the market, said: “While on the surface this might look good for investors, in essence this appears very much like marketing ramp. Anybody can launch a business by promising to offer something for free. It's been a well-known practice in the software industry over the years."
He added: "One basically offers something that is free...on the basis that thereafter you are going to make money [from other services]. Furthermore, the initial "free" service can be turned off as quickly as it was turned on." Lawson pointed here to IG Index having at one time offered free trading on the basis that they "would capture" additional clients and generate more business."
On the service level front, Trading 212 offers a live chat functionality and claims a response time of "47 seconds." But clients can also speak over the phone to customer representatives. Lawson pointed out: "What you can find is that brokers offering a very low cost service [or this case zero cost], everything is fine if no problems arise. However, if there any tricky transactions or things go wrong in any way then the service be less than robust."
Future Moves
Ashminov revealed during our conversation in The City that in the next few month the firm he founded will launch additional services, assuming all goes well. "The main one will be robo investing, so that those investors who want to manage their portfolios will be able to avail themselves of this service for a fee."
In terms of the current ownership structure, Ashminov owns the company on a 50-50 basis with his business partner. He revealed: "Until now we have never taken any outside capital on board. Now [though] we are considering potential external investors and also thinking about potential IPO in the future."
However, he added a caveat: "We will only do that if [such an injection of capital] will help us accelerate the growth of the company." And, for the last 12 months the company made profit of around £25 million (c.$33 million).
Life looks like it is certainly getting cheaper when it comes to trading equities in the U.K. for retail investors. And, no doubt others will follow in Trading 212's footsteps.
The big question remains whether it will all stack up - even if the technology behind their platform is held up as being "immensely scalable" and the customer service levels and user experience are not negatively impacted if growth for the firm dramatically increases going forward.
And, while a universe of around 1,800 stocks being offered is pretty considerable for most, whether the platform will bring its full weight to bear in the small cap segment and the Alternative Investment Market (AIM) of the London Stock Exchange, where there can be less liquidity on particular stocks, might be another matter.
Individuals wishing to open an account with Trading 212 can do so with as little as £100 (c.$130). Trading 212 customers are provided with full regulatory protection as Trading 212 UK Limited, is authorized and regulated by the UK’s Financial Conduct Authority, and registered in England and Wales.
